By William G. Stiglitz

Legal and effective incentive compensation still under fire

There is a critical need to preserve the right of insurance companies to determine how best to compensate the insurance agents and brokers who sell their products. In this regard, the insurance industry is like virtually every other business distributing products through a sales force. Most companies want the flexibility to reward strong sales performance as they see fit, including through financial rewards such as incentive compensation. It is widely used because it is both legal and effective, and should remain a choice available to insurance carriers. This right is fundamental to the efficient operation of insurance companies in a healthy, competitive, free-market economy.

Insurance companies recognize that agents and brokers must invest substantial time to identify consumers’ wants and needs; understand the complex terms of policies available; assess the products to present; offer choices about coverage, price, service, and financial strength of carriers; and remain available to assist insureds with questions and policy changes, as needed. And, insurance companies also recognize that this investment by agents and brokers provides important value well beyond the initial sale by meaningfully enhancing the relationship between the insurance company and the insured. The value of that investment is one of the many reasons why companies in the United States and around the world use a variety of compensation structures, including commission and incentive compensation, to reward sales professionals.

Uncovering the real problem

The problem uncovered in the insurance industry by legal and regulatory investigations is not the form of compensation. The problem occurs when there is illegal activity, such as bid-rigging and false quoting, to obtain that compensation. We support the prosecution of such illegal activities. But we oppose restrictions on companies that bar them from making legal payments to their sales force.

When a customer walks into an electronics store to buy a new television, the consumer wants to know the price of different models, the features they have, the reputation and reliability of the manufacturers, the service record of different brands, the warranty offered by each, and more. While the electronics store may be compensated differently by various manufacturers, including through incentives based on sales volume, the consumer is not interested in or concerned about the incentive compensation paid to the store based on how many television sets it sells or even how much commission the sales person that makes the sale is getting. The consumer knows that the television’s price is not influenced by the compensation arrangement between the store and the manufacturer.

This principle also holds true in the insurance industry. The factors that motivate a consumer to purchase insurance are the coverage, features and price of the policy, service record of the carrier, financial strength of the insurer, company reputation for paying claims, and the like. Consumers do not decide what insurance to buy based on how the sales force is compensated any more than they choose coverage based on the compensation and perks paid to insurance company executives, TV advertising and marketing costs incurred by direct writing companies, or any other expenses companies have in selling their products.

Incentive-based pay: Not a bad thing

Incentive compensation has been an accepted way of doing business in all industries for centuries. Its use is widespread, with varying structures that take into account productivity and profitability. Incentive compensation encourages agents and brokers to become better risk management advisors for insureds. Insurance agencies have no way to know if they will qualify for incentive compensation from any insurer until after the close of the company’s fiscal year because it is only then that the profitability of the business generated can be determined.

Consumers understand that incentive compensation is not inherently bad in the insurance industry or in any other type of business. Unfortunately, there are people in every industry who circumvent or break the laws. We believe that the laws must be enforced, and prosecution for bid-rigging or false quoting should be pursued vigorously.

In a competitive business like the insurance industry, insurance agents and brokers know that trust and service are crucial to long-term success. There are thousands of property/casualty, life, and health insurance companies in the United States, and more than one million agents and brokers, as well as many distribution channels from which consumers can choose. This amount and intensity of competition requires that agents and brokers consistently provide insureds with the level of choice, service, and advocacy that the market and consumers demand in order to attract and retain business.

We strongly believe that each insurance company should have the right to decide how to compensate its sales force, including the right to offer and pay incentive compensation within the law. It should be a right that is preserved to foster a strong competitive insurance environment.

William G. Stiglitz III is an account executive with Hyland, Block & Hyland Inc., in Louisville, Ky., and is the current president of the Independent Insurance Agents & Brokers of America.

Topics Carriers Agencies Market